Let the Scary Times Roll

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 |  Includes: EFZ, PSQ, RWM, SEF, SH, SKF, SPY, VXX
by: Wall Street Sector Selector

Last week’s economic news and market action was decidedly scary; however, I’m feeling quite comfortable as we’re now positioned 100% to the “short” side in our Standard, High Conviction Trade Alert and Option Master Portfolios.

The Standard portfolio now holds 5 inverse ETF positions, while the High Conviction Trade Alert is focused on action in the VIX and the Option Master gained +20.8% in unrealized gains this week with our new position opened on Wednesday.

We expect more volatility next week, in spite of being in what’s supposed to be a calm time of year as summer winds to a close, and remain in the “Red Flag” mode, expecting lower prices ahead.

Looking at My Screens

The S&P 500 closed solidly below its 50 Day and 200 Day Moving Averages this week and the “death cross,” the 50 day below the 200 day remained in effect, as well, indicating major weakness across this bellwether index.

My momentum indicators all point to continued slowing while investor sentiment remains neutral.

The only positive sign from a technical perspective last week was the fact that the index bounced off significant support at 1060 and so could find itself in a trading range until “Wall Street” returns from the Hamptons after Labor Day weekend.

Furthermore, there’s lots of chatter in the blogosphere and even the mainstream press about the “Hindenburg Omen” that was triggered on August 12th and apparently was confirmed this week with a second and even third occurrence, indicating an increasing likelihood of a significant sell off or even a potential crash.

As I mentioned last week, I’m only a casual observer of this “omen,” however, it does appear to have statistical validity, particularly when it’s confirmed by repeated events in which case a 5% decline has occurred approximately 75% of the time, major sell offs 41% of the time and market crashes 24%. Out of 25 confirmed signals, 23 were successful precursors of measurable stock market declines. Recent Hindenburg events were on August 20, August 19th and August 12th.

Like any technical indicator, this one has inherent weaknesses and I’m always looking for confirmation from my own measurements; today everything I see points to the probability of more downside ahead. I don’t know and actually don’t care if this indicator is valid or not but it makes for interesting reading and these widely watched indicators like “head and shoulders” tops, etc, can often become self fulfilling prophecies as the herd all looks at the same things. For a summary description of the Hindenburg Omen, check out Wikipedia.

The View from 35,000 Feet

Last week brought a raft of economic news that ranged from the merely scary to truly shocking.

Oil continued its sharp decline, reflecting uncertainty about the global economic slowdown, and closed at $73.82, down from more than $80 at the beginning of August.

The two most dismal reports were the new unemployment claims rising to 500,000 compared to an expected 475,000 and the Philadelphia Fed manufacturing report dropping to a -7.7 from July’s +5.1 and an expected +7.5.

On the unemployment front, this was the highest reading we’ve seen since November, 2009, and indicates significant ongoing weakness in this important driver of economic activity. The Philly Fed report focuses on manufacturing in the eastern region including Pennsylvania and New Jersey and shows an unexpected drop off in manufacturing activity.

China’s economy continued slowing as new forecasts point to declining growth into single digits and the Euro was down sharply due to lingering concerns about weakness in Europe and he strength of their banks.

The New York Empire Index, also focused on manufacturing, came in below expectations, the NAHB Housing Index, Housing Starts and Building Permits all came in below expectations and so all in all it was a dismal week for economic news even as the Fed continued its efforts to prop things up with “QE2,” its continuation of its quantitative easing activities.

And, finally, 8 banks were closed on “Bank Failure Friday,” bringing the year’s total to 118. Thank goodness for the FDIC or this would be Great Depression 2.0, in my opinion.

What It All Means

In a word, slower growth is likely and scary times ahead for the stock market.

The Week Ahead

More news this week in the real estate market, GDP and consumer sentiment.

Economic Reports:

Tuesday:

10:00: July Existing Home Sales

Wednesday:

08:30: July Durable Goods, July New Home Sales

Thursday:

08:30: Initial Unemployment Claims, Continuing Unemployment Claims

Friday:

08:30: Q2 GDP 2nd Estimate

09:55: University of Michigan Consumer Confidence August Final Report

Sector Spotlight:

Leaders: Internet, South Korea, Japan

Laggards: Wind energy, natural gas, regional banks

I’m running to catch a plane home from Shanghai today as we wrap up our China vacation. It has been a great trip and I’ve learned a lot. It was particularly interesting to be here as China surpassed Japan as the world’s number two economy. Even the cab drivers were excited. This is a big topic for another day and I look forward to discussing all of this in greater detail when I get home.

Disclosure: Positions in RWM, PSQ, SH, EFZ, SEF, SKF, VXX and Spy Put Options